Kaifu Lee: Some Promising Investment Areas In The Chinese Startup World

摘要: Of course, Chinese entrepreneurs are finding it harder to launch a new round of financing or raise enough money for their project. Of course, there are bubbles in some O2O areas where startups fail to keep their user based even after “burning” too much money. Of course, an increasing number of startups go bankruptcy than ever before. However, it doesn’t follow that the entire Chinese Internet industry is facing a bubble.

(Chinese Version)

Editor's Note:

During the 8th LinkedIn Thought Speaker Forum held on November 8th, Kaifu Lee, CEO of Innovation Works delivered a keynote speech on the Chinese startup scene. In the speech, he shared with the audience his opinions on a series a topics, such as the difference of American and Chinese startup scene, the investment areas that seem very promising for Innovation Works, what kinds of O2O startup projects his team prefer to invest in, as well as things what he has learned during the past six years in Innovation Works, etc.

The following is the full transcript of Mr. Lee’s speech, edited by TMTpost:

Ladies and gentlemen,

It’s great honor to join you tonight along with Reid Hoffman, one of the most respected investors of mine. After thinking for a while what you might be interested, I decided to talk about mainly the following three things: First of all, why is the startup scene in China so exhilarating? Secondly, what is Innovation Works about, what kind of projects are we primarily focused and investing in and why are these projects so important to us. At last, I want to share with you what I have learned during the past six years in Innovation Works.

The heyday of startups hasn’t passed yet in China

To begin with, I’d like to talk about what the startup environment in China is “really” like. Recently, you may often hear people saying that the “winter” has come for entrepreneurs and investors, in other words, it isn’t a good time to start or invest in a company in China right now. At the same time, however, thousands of passionate and daring entrepreneurs are still looking for their investors along the Innovation Way around Zhongguancun area. What exactly is the startup scene in China like?

Statistics suggest that 2/3 of the most valuable companies around the world are based in the US, while 2/3 of the rest 1/3 are based in China. In other words, 2/9 of the most valuable companies globally are from China.

I do admit that American startups are better at promoting their development models else around the world, while Chinese startups seem to be content to develop merely in the Chinese market. However, with the rapid development of the Chinese Internet industry, the biggest one around the world, huge possibilities are out there. So basically I am very confident about the future development of the Chinese Internet industry, especially when taken into consideration the following four aspects:

First of all, the Chinese Internet market are huge. Market size begets market potential. Statistics suggest that there are around 7oo million Internet users in China and 200 million users in the US. If market potential is the square of market size, than the market potential of the Chinese market will 12.25 times larger than that of the US. Theoretically, the day will come when China surpass the US and become the number Internet market around the world. In addition, major Chinese cities are densely populated, making O2O services in huge demand compared to those in the US. At the same time, the Chinese Internet industry develop so quickly thanks to the cheap labor force here in China. The large crowd of blue-collar workers are the engine of the Chinese Internet industry.

Secondly, government policies are carried out very quickly here in China, which creates huge possibilities for entrepreneurs. For example, when the government impose severe punishment on drunk drivers, substitute driving companies are established one after another to cope with the new circumstances; when free trade zones are established in Shanghai and Guangzhou, some entrepreneurs seized the opportunity and began to import milk powder and even cars and sell them to consumers outside of the free trade zone. In the US, this is totally not the case at all, since a government policy needs to be fully discussed before being carried out, and states will have to discuss the policy further before approving it, which makes it hard for American entrepreneurs to seize opportunities and make quick reactions.

Thirdly, an entire startup and investment chain has been established here in China, from incubators to angel capital investors, from A-round to B-round financing investors, from public crowdfunding to private equity crowdfunding, etc. Chinese entrepreneurs are supported by this large number of investors and are given full charge of their companies. They don’t fear failure and are brave enough to start their new projects after failures. As a matter of fact, most entrepreneurs succeed after failing for once or twice here in China.

Fourthly, the inconvenient truth is that traditional Chinese enterprises are too weak in the face of competition from Internet companies. In China, startups have the opportunity to build their own brand without the fierce competition from traditional companies. This is also not the case in the US, where most industries are already dominated by traditional companies and it can be really hard to establish a new brand.

What makes Innovation Works different

Of course, Chinese entrepreneurs are finding it harder to launch a new round of financing or raise enough money for their project. Of course, there are bubbles in some O2O areas where startups fail to keep their user based even after “burning” too much money. Of course, an increasing number of startups go bankruptcy than ever before. However, it doesn’t follow that the entire Chinese Internet industry is facing a bubble. After all, there are 700 million mobile Internet users in China, half among whom are using mobile payment tools. In my point of view, the US is ahead of China merely because the huge capacity to pay due to the widespread of credit cards.

Although money-burning behaviors may create a bubble in some areas, they do have some positive impacts. For example, when Tencent and Alibaba gave out huge amount of subsidies to promote the online car-hailing apps, they also gradually get Chinese consumers into the habit of mobile payment. That’s when startups should seize the opportunity and further explore the potentials of these positive impacts. For sure, they might be under greater pressure to raise money, yet those who are really keen on their cause and perseverant enough will survive after all.

At this point, I want to briefly introduce to you what Innovation is all about and what makes us different from others.

Fundamentally, Innovation Works is an investment company and we make profits by investing in other companies, similar to leading American investment companies such as IDG and Sequoia. Basically, we invest in a company after angel capital investors and before A-round investors. Why so?

On the one hand, we don’t want to merely invest in these companies. After finding a really promising startup project, we will do everything we can to help it expand in the early stage, for example, by helping it recruit new employees, make profit, maintain a good public relation, etc. That’s why we choose to invest before A-round investors and after angel capital investors.

On the other hand, we don’t want to compete with other angel capital investors such as Alibaba and Tencent. Instead, we want to befriend them and ally with them. After entrepreneurs have found an angel capital investor, they might as well turn to Innovation Works next.

Some promising investment areas

I am proud to say that we have always been far-sighted over which areas are worthy of investing. I don’t think it’s too hard to predict which area might be promising in the future since history often repeats itself. Based on the evolution from tool to entertainment and from e-commerce to advertising in the era of PCs, we predicted that the same thing will happen in the era of mobile Internet. That’s why we first invested in Android, a tool, then some social networking projects and games in entertainment area, and then O2O projects and advertising projects. We didn’t invest in e-commerce and groupon service area because we foresaw too much obstacles in these areas.

At present, we are very much confident about the development of online video. To make it clear, we are not going to support another online video website, but rather online entertainment programs that first appear on the Internet, meet the needs of the public for fast learning as well as entertainment. While TV programs are commonly one-to-many, these programs are produced based on the interaction with fans and audience on the Internet. A typical example is iQiyi’s debate program You Can You BIBI, which featured some very controversial and fun debate topics, debaters and debate techniques and became popular overnight. In the future, we will support startups in producing more similar programs in other areas, such as cooking, singing, etc.

In addition, since investment managers in Innovation Works mostly graduated from key science and engineering universities, they are very interested in the smart hardware industry. Although we are very positive about the potential of this market, we don’t think the time is ripe for us to invest in any giant IoT platform, because the industry is still on the rise and no industry standard has been established yet. As compromise, we chose to invest in startups that are making some really useful hardware and solving real problems, for example, smart pianos that make it easier to learn, devices that make it easier to measure diabetes patients’ blood sugar, routers that make surfing the Internet faster, etc. At the same time, we are also investing in startups that are developing cutting-edge technologies and applying them to solve real problems, such as chips that can be directly used on another products as well as face recognition technologies that can be used to control the door and only allow employees whose faces are recorded in the system to pass, etc.

What kinds of O2O startups will we invest in?

We never invest in startups that “burn” money but win no user at all. After years of experiences, I figure out that we will only invest in startups that fit the following three standards:

First of all, there has to be a large enough market for the startup; otherwise, we don’t expect that the startup to make a difference in the future;

Secondly, the startup has to provide very professional and standardized service, such as online car-hailing service, while services such as O2O manicure and housekeeping can never be quite successful.

Thirdly, the service the startup provides must be frequently demanded (once a week or every two or three days), for example, online takeaway-booking service and online hairdressing-booking service. The startup has to provide some really useful and unique services and can make an adequate amount of money out of it.

For example, we invested in an O2O startup company that saw the huge gray income in traditional house decoration business and made huge money by training its own craftsmen and providing high-quality and standardized services, which lowered the cost significantly.

Let me briefly introduce to some startup projects we used to invest in: in online education sector, we invested in BOXFiSH, an online platform focused on high school English education, as well as VIPKID, an online platform that links British kindergarten teachers with Chinese students and makes English learning a lot more fun for kids. In B2B sector, we invested in a purely B2B platform to better connect different business owners and create more cooperation opportunities.

You might notice that the areas Innovation Works chose to invest in were slightly different from common-perceived ones, but I am glad to share this piece of information with you and hope you might dive deeper on this topic if you are interested.

What I’ve learned in Innovation Works

At last, I want to share with you three things I have learned in Innovation Works during the past six years.

Above all, I find that many entrepreneurs are born with qualities essential for their future success. Many people might turn to me and ask me if they should start their own business? My answer is always “No, you shouldn’t” because real entrepreneurs like Jack Ma and Lei Jun will never ask such questions. I used to believe that entrepreneurs were nurtured in a good environment and I have been trying to do so for many years. Yet, I gradually find that some qualities essential for entrepreneurs, such as confidence, perseverance and eloquence are innate in lots of entrepreneurs, especially the leading few.

Moreover, I find that I do prefer to recruit smart entrepreneurs and invest in their startup projects, yet I also notice that smart people tend to have too many ideas and lacks the determination to focus on and carry out an idea one at a time.

In addition, I realize the importance of teamwork for any startup project. We did attempt to pair some entrepreneurs for a while, but as their value system varies significantly, many startup projects turned out in failure. Gradually, we reach a consensus among investors that we prefer to invest in startup teams whether made up with old friends or led by a dominant leader.

Of course, there are a lot more things I want to share with you, but time is limited and I’ve got to only pick the above three. Anyway, I hope they will be helpful to you one day.


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[The article is published and edited with authorization from the author @TMTpost-Chinese, please note source and hyperlink when reproduce.]

Translated by Levin Feng (Senior Translator at PAGE TO PAGE), working for TMTpost.




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